Been There, Done That — Housing is Still Somewhat Affordable

Ever get that Déjà Vu all over again feeling – like you have been there and done that? Déjà Vu is French for Already Seen –and that appropriately describes what is going on in housing markets and interest rates today. Up front we need to recognize that interest rates in recent years and today are abnormally low. The following graph shows the monthly rate (weekly surveys averaged in the Freddie Mac Primary Mortgage Market Survey). Freddie Mac commenced their weekly survey of lender rates in April 1971 and have averaged these into monthly rates now for 569 months. Rates did not even fall below 7 percent for the first 22 years of Freddie Mac’s data collection.

less than 5 percent in just 107 of the 569 months (18.8 percent) since Freddie Mac commenced reporting these data

greater than 6 percent 73.8 percent of the time

greater than 7 percent 61.9 percent

greater than 8 percent 45.5 percent of the time (almost one-half)

more than 9 percent in almost one-in-every-three months (32 percent)

more than 10 percent 22.7 percent of the time

Thus, since 1971 mortgage interest rates have spent more time above 10 percent than below 5 percent. Interest rates peaked at 18.454 percent (on a monthly basis) in October 1981 and hit the all-time record low in November 2012 of 3.345 percent. As of the week ending September, Freddie Mac reports rates 4.454 percent and having averaged 4.22 percent in 2018.

When looking at buying a home, four major factors come into play:

what it costs to rent

the level of income that can fund the purchase

home prices

interest rates

The next table examines three of these on an annualized basis (since median household income is reported just annually). This table shows the following metrics annually since 1990:

median household income (not seasonally adjusted nor adjusted for inflation). Note: median household income for 2017 was estimated by increasing the 2016 median income level by 2.6 percent (the Bureau of Labor Statistic’s reported hourly wage increase) and 2018 by 2.7 percent

median existing home prices (again, not adjusted, and calculated by taking the average of the monthly medians for each year)

The annual median home price was then divided by median household income to show how much a home was as a multiple of income for each of the years.

The current home price is an estimated 4.13 multiple of household income. The peak was in 2005 at 4.74 times income and the trough 3.22 in 1990. That means that 2005 home prices, contrasted to incomes were 12.9 percent greater than today. When you also include mortgage interest rates, which at 4.53 percent today compared to 5.87 percent in 2005, affordability is much greater today,

Another comparison is 2003, which had an identical home price to income multiplier of 4.13. Rates then were 5.83 percent versus 4.53 percent today – almost 29 percent more.

While prospective homebuyers today feel oppressed by price levels and interest rates, they have been much more restrictive in the past.